Friday, March 29, 2013

China’s e-tail revolution

 Commerce is changing the face of retailing; globally redefining supply chains. Aivars Lode

Almost overnight, China has become the world’s second-largest e-tail market, with estimates as high as $210 billion for revenues in 2012 and a compound annual growth rate of 120 percent since 2003. The country’s retail sector already is among the most wired anywhere—e-tailing commanded about 5 to 6 percent of total retail sales in 2012, compared with 5 percent in the United States—while it is distinctly different from that of other countries. Only a small portion of Chinese e-tailing takes place directly between consumers and retailers, whether online pure plays or brick-and-mortar businesses on retailers’ own Web sites. Instead, most occurs on digital marketplaces. What’s more, Chinese e-tailing is not just replacing traditional retail transactions but also stimulating consumption that would not otherwise take place. Finally, e-tailing may catalyze a “leapfrog” move by the broader retail sector, putting it on a fast track to a more digital future. These are among the key findings of China’s e-tail revolution: Online shopping as a catalyst for growth, a new report by the McKinsey Global Institute.

Structural differences

Some 90 percent of Chinese electronic retailing occurs on virtual marketplaces—sprawling e-commerce platforms where manufacturers, large and small retailers, and individuals offer products and services to consumers through online storefronts on megasites analogous to eBay or Amazon Marketplace.1 The megasites include PaiPai, Taobao, and Tmall, which in turn are owned by bigger e-commerce groups. A large and growing network of third-party service providers offers sellers marketing and site-design services, payment fulfillment, delivery and logistics, customer service, and IT support.
By contrast, in the United States, Europe, and Japan, the dominant model involves brick-and-mortar retailers (such as Best Buy, Carrefour, Darty, Dixons, and Wal-mart) or pure-play online merchants (such as Amazon), which run their own sites and handle the details of commerce. Developed markets have major specialized retail chains in the e-commerce arena. In China, such independent merchants account for only 10 percent of e-tailing sales. Although still in the early stages of growth, China’s e-tail ecosystem is profitable, logging margins of around 8 to 10 percent of earnings before interest, taxes, and amortization—slightly higher than those of average physical retailers.

Powering consumption

This unique e-tailing engine is enabling China’s shift from an investment-oriented society to one that’s more consumption driven. E-tailing, our research indicates, is not simply a replacement channel for purchases that otherwise would have taken place offline. Instead, it appears to be spurring incremental consumption, particularly in less developed regions. By analyzing consumption patterns in 266 Chinese cities accounting for over 70 percent of online retail sales, we found that a dollar of online consumption replaces roughly 60 cents of sales in offline stores and generates around 40 cents of incremental consumption (Exhibit 1). It’s important to note that the data sets behind this analysis don’t cover the full market. Our approximations do, however, provide a preliminary picture of what’s occurring in China and permit a rough calculation of the extent to which e-tailing may be boosting consumption there. (These estimates suggest that the channel may have added 2 percent of incremental value to private consumption in 2011 and could generate 4 to 7 percent in incremental consumption by 2020.)
Exhibit 1
China e-tailing - Exh1
E-tailing’s impact is more pronounced in China’s underdeveloped small and midsize cities. We found that while incomes in these urban areas are lower, their online shoppers spend almost as much money online as do people in some larger, more prosperous cities—and also spend a larger portion of their disposable income online (Exhibit 2). For these shoppers, the utility of online purchasing may be higher, since they now have access to products and brands previously not available to them, in locations where many retailers have yet to establish beachheads.
Exhibit 2
China e-tailing - Exh2
Further boosting online purchases is the fact that e-tailing has cut consumer prices: depending on the category, they are, on average, 6 to 16 percent lower online than in China’s stores.2 Apparel, household products, and recreation and education are the categories where price discounts are greatest. They are also the three largest online retail segments (Exhibit 3).
Exhibit 3
China e-tailing - Exh3

The leapfrog effect

China’s retailing industry, coming of age in an era of digital disruption, will probably follow a trajectory different from that of retail sectors in other markets. In developed nations, the industry typically followed a three-stage path. It began with the rise of regionally dominant players. This field then consolidated into a smaller number of national leaders. Eventually, online players challenged them, and the industry became multichannel. Some brick-and-mortar players (Tesco and Wal-Mart Stores, for instance) have embraced a multichannel strategy, while others (such as Borders in the United States and Jessops and Woolworths in the United Kingdom) have been driven from the market.
China differs from these developed markets, however, because a crop of national leaders has yet to emerge in traditional retailing. Building stores across China’s considerable geography, with its many smaller cities, takes both time and high levels of investment. As a result, China’s largest brick-and-mortar retailers have captured a smaller share of the country’s overall retail market than have major players in the United States and elsewhere: the top five retailers by category hold less than 20 percent of the market—much lower than US levels of 24 to 60 percent in comparable categories.
In China, the combined effects of the complexities of store expansion and a distinctive model of e-tailing could lead to a different retail dynamic: as e-tailing continues to grow, China’s industry may leapfrog the second (national) stage, passing directly from the regional to the multichannel one. In fact, China’s online ecosystem of marketplaces and agile support services has grown rapidly precisely because it can exploit the inefficiencies and higher costs of China’s existing retail market. Already, the major online companies Alibaba (which owns marketplaces such as Taobao) and (focusing on sales of electronics) have established a prominent national role, ranking among China’s top ten retailers.

Coming next

The view forward may be more impressive. We estimate that by 2020, as 15 to 20 percent annual growth rates (before inflation) continue, e-tailing could generate $420 billion to $650 billion in sales, and China’s market will equal that of the United States, Japan, the United Kingdom, Germany, and France combined today.3 Patterns of future change are coming into focus.
Retail modernization
E-tailing will continue to transform the retail sector. As competition among e-tailers has lowered prices, it has also both increased the size of the consumer market and created efficiencies in the important adjacent markets that support e-commerce—logistics, supply chains, IT services, and digital marketing. This efficiency edge should force brick-and-mortar retailers to modernize and pave the way to a more efficient coordination of supply and demand across the Chinese economy.
One cloud hanging over the e-tailing scene is a growing talent shortage resulting from heady growth. Eventually, it could raise labor costs and hamper expansion plans unless e-tailers significantly improve their labor productivity, which at best matches that of physical retailers. The good news is that if the online ecosystem learns from developed markets, e-tailing’s productivity should rise as high as two to four times that of offline retailers.
Meanwhile, China’s store-based retailers, and the manufacturers that supply them, will need to place some new bets—soon. Many have yet to fully embrace multichannel strategies, focusing instead on the sizable growth and consolidation opportunities still available in their brick-and-mortar businesses. They’ll have to decide whether to join existing e-tail marketplaces or establish their own online storefronts and whether to own parts of the value chain (such as distribution and IT) or use third-party suppliers.
To what extent will e-tailers bypass virtual marketplaces?
As the e-tail ecosystem diversifies and matures, merchants that today use digital marketplaces may find it tempting to pursue growth by operating independently. To do so, these companies must go beyond current strategies, which depend chiefly on products and prices, where competition already is fierce. Instead, to build a strong online brand, e-tailers will need to dedicate management resources and investments to creating an attractive package of value propositions—superior customer service, fast and reliable delivery, a better shopping experience, or more targeted marketing. That will require a new level of capabilities and, perhaps, partnerships with experienced players outside China.
Consumer companies: Threats and opportunities
Since marketplaces hold the leading share of China’s e-tailing market, they are a natural place for consumer-products manufacturers to focus when they enter China—or grow outside its leading cities. Marketplace ecosystems provide a business infrastructure to reach customers at a reasonable cost. That infrastructure is particularly valuable for new entrants, which may find it an economical way of testing a market’s temperature. Uniqlo, for one, used a combination of marketplaces and service providers when it started its online apparel business in China in 2009.
At the same time, however, e-tailing innovation is creating more competition. New entrants have sprung up on the major e-tail marketplaces (known as Taobrands on the Taobao marketplace) to sell lines such as apparel and cosmetics directly to consumers. With products sourced straight from workshops and OEM factories, and sales stimulated by targeted marketing campaigns, these immensely popular companies offer good quality and attractive prices.
Meanwhile, China’s model and innovations are spilling beyond its borders. Other emerging economies are developing e-tailing markets that could follow China’s business model—and potentially achieve similar growth rates. China’s new marketplace sellers are expanding internationally, leveraging their direct access to Chinese workshops and OEM factories. Global consumer-goods players should be ready to face competition from Chinese small and midsize enterprises and microbusinesses selling directly through marketplaces in emerging economies.
China may have largely sat out the 19th-century Industrial Revolution, but as the explosion of its new consuming class continues to reshape 21st-century economic life, e-tailing and the Internet revolution have important roles to play. E-tailing is boosting the Chinese consumer’s propensity to spend. The distinctive course charted by the country’s e-tailers is having an impact on merchants, consumer-product companies, and value-chain partners. And it’s widening the field of opportunities for players both in and outside China. With continued robust growth, changes in industry business patterns that are already under way will only grow in importance.

Tuesday, March 26, 2013

Why NOW Is a Great Time to Buy Dividend Stocks

As discussed years ago. Aivars Lode

By Steve Sjuggerud and Brett Eversole, True Wealth Systems
Tuesday, March 26, 2013
Every long-term investor knows dividends matter.

Since 1900, the average annual gain on the S&P 500 has been 5%. But by simply reinvesting your dividends, you nearly double that number to 9.4%.

But what's the most valuable way to put dividends to work? Most folks will say you should buy stocks when dividend yields are relatively high. And that's true…

But there's another number you should be watching.

As I said, dividends make a big difference in your long-term stock returns. And the difference adds up…

Without dividends, $10,000 invested in 1900 would have turned into more than $2.5 million today. But by simply reinvesting your dividends,the same $10,000 turns into more than $263 million. That's a 10,420% increase, simply by reinvesting dividends.

Now, you might think that buying when the dividend yield on stocks is high would be a winning strategy. And while this beats the long-term average return on stocks, we put our True Wealth Systems computers to work to see if we could do better.

Our results might surprise you…

To test the idea, we looked at "relative" dividend yields, meaning the current dividend yield versus the dividend yield of the last three years. If today's yield is the highest of the last three years, yields are at a "relative" extreme, and we should buy.

This idea works. Since 1900, the average five-year return on stocks, with dividend reinvestment, is 56.3%. But buying and holding (and reinvesting) for five years when dividends are at a "relative" extreme increases our returns to 64.1%.

That's a big improvement. But our computers found an even better way to use dividends…

You see, we also need to understand how dividend yields compare with other investments – specifically, basic government bonds.

For example, a 5% dividend yield would be amazing today, with our ultra-low interest rates. But in 1982, when 10-year Treasurys were 14%, a 5% dividend yield wasn't a great deal.

So to determine relative value, we looked at the "spread" between S&P 500 dividend yields and 10-year Treasurys, using the three-year "relative" extreme to tell us when to buy. The results are below…
Five-Year Return 
Annualized Return 
Buy & Hold
Dividend Spread

As you can see, buying based on the dividend spread not only increases our returns over buy-and-hold… but it also beats buying simply based on dividends.

The results are simple… dividends matter. But the spread between dividends and U.S. Treasurys matters even more. Buying when the spread is high is an easy way to increase your stock returns over the long term.

Today, our system says it's time to buy. Last month's spread reading was at a "relative" extreme.

Based on history, buying today should lead to above-average returns over the next five years.

Good investing,

Steve Sjuggerud and Brett Eversole